Councils face more disclosures on their commercial property investments

The government has released proposals demanding more disclosure from councils on their commercial property investments—while the threat of a Treasury ban on borrowing for non-local acquisitions still looms over the sector.

The DCLG has published its proposed update to the Local Authorities Investment Code and Minimum Revenue Provision (MRP) Guidance to cover non-financial yield-bearing investments.

The consultation document comes in response to councils’ increasing desire to raise revenue from commercial activity due to shrinking grants and the low interest rate environment.

The document said: “The government does not want to discourage local authorities from investing to deliver local economic regeneration, even if this means taking on projects that the private sector may not consider.

“However, the government believes that local authorities need to be better at explaining ‘why’ not just ‘what’ they are doing with their investment activity.

“That means that the sector needs to demonstrate more transparency and openness and to make it easier for informed observers to understand how good governance and democratic accountability have been exercised.”

Paul Dossett, head of local government at accountancy firm Grant Thornton, said: “Putting a high requirement on the amount of information on why the council is making an investment is not necessarily a bad thing.

“But the extra scrutiny could make it easier for opposition councillors and local newspapers to claim the council is wasting taxpayers’ money. It will no longer be good enough to just say we have had a financial adviser scrutinise the deal.”

Commercial investment changes

The guidance recommends councils outline the contribution that non-core investments make towards their core functions, including through the use of new quantitative indicators.

David Green, client adviser at treasury adviser Arlingclose, said: “It is interesting, at a time when CIPFA’s code revisions are attempting to reduce the amount of detail presented to members, that this seems to be going in the opposite direction.”

The document also proposes requiring local authorities to disclose their dependence on commercial income to deliver statutory services.

It said: “The government is concerned that some local authorities may become overly dependent on commercial income as a source of revenue or delivering statutory services. Given the nature of assets that local authorities are investing in this could leave them exposed to macro-economic trends.”

Dossett said: “This is a slightly odd worry—the only reason a local authority would become too dependent on commercial income is if government decided to cut grants.”

Councils borrowing solely to raise income would also be required to disclose more information under one of the consultation proposals.

One senior sector figure said: “Taken together with the Prudential Code, this could restrict the ability of councils to borrow to make commercial investments. There is concern across the sector about this and whether it will restrict councils’ ability to make themselves financially sustainable.”

MRP restrictions

Proposed changes to the MRP guidance would change the definition of “prudent provision” for the borrowing which finances the acquisition of each asset.

Revised wording would require local authorities “to set MRP in a way that covers the gap between the Capital Financing Requirement and the amount of that requirement that is funded by income, grants and receipts”.

In addition, the government will ban the retrospective calculation of overpayments of MRP to be offset against annual charges.

It said: “The government has concerns that some local authorities have been changing methodologies, not because the change would better allow them to make prudent provision, but instead to reduce their annual charge and in some cases to allow them to defer payments into future years.”

Finally, the proposals would ban councils from setting “artificially long asset lives to reduce the annual charge for MRP. It would therefore introduce a maximum useful economic life of 50 years for freehold land and 40 years for other assets.

Stephen Sheen, managing director of technical accounting consultancy Ichabod’s Industries, said: “This seems to ride roughshod over the idea that councils can be trusted to make prudent judgements about the useful life of their assets.

“40 years is far too short for some authorities investing in infrastructure projects such as road tunnels which will last for 100 years or more. These are judgments councils should be trusted to make.”

Green said: “The release of this consultation does not in any way preclude the chancellor from announcing restrictions on council borrowing to fund property investment elsewhere in the country.”

One senior figure in the local authority finance world said: “It feels strange to publish this just 10 days before the budget if the Treasury is going to put out something else; but such dislocation is not unheard of – it has happened before.”

An LGA spokesperson said: “Councils have been encouraged to fund ways of protecting services by generating income from alternative sources to replace lost central government funding.

“For many councils, the income from their investments, which have been made prudently, have enabled them to protect services.

“Councils must be able to continue to make prudent investments that are of benefit to their areas and any moves to restrict would be unnecessary and unwelcome.”

The consultation, open until 22 December, also asks for opinion about whether the changes should be introduced for the start of the 2018/19 financial year.

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